China will likely wait out the trade war as it bets on its own economy

As trade tensions with the U.S. draw out, the world’s second largest economy will likely seek to beef up its domestic economy, which contributes more to growth than its exports, according to analysts.
“We describe China’s current strategy as ‘endurance’: the main goal is to preserve China’s economic resilience, while taking the higher US tariffs as a given fact,” Deutsche Bank economist Yi Xiong wrote in a report.
Meanwhile, China will also try to diversify its supply chains and accelerate its opening up to other countries – reducing its reliance on the U.S. in the longer term.

China’s best option in the trade war is to wait it out, experts say, as it’s huge domestic economy is increasingly being driven by the power of its consumers — not trade.

Playing the long game is “probably the best and only option” that China has, said Chung Man Wing, investment director at Value Partners.

As trade tensions with the U.S. draw out, the world’s second largest economy will likely seek to beef up its domestic economy, which contributes more to growth than its exports, according to analysts.

“The (Chinese) government is trying to buy time in terms of using the window to restructure the domestic economy … the domestic corporate sector,” Chung told CNBC on Thursday.

External trade make up only a “very small portion” of China’s economy — and form only about 20% of its gross domestic product, he said. “And majority of that is actually not to the U.S., so China can afford to play the long game, and play it well.”
China’s growth is domestically driven; consumption and infrastructure investment deserve more attention than exports.
ANZ

In fact, Deutsche Bank said in a Wednesday report that as much as 80% of China’s exports went to countries other than the U.S.

“We describe China’s current strategy as ‘endurance’: the main goal is to preserve China’s economic resilience, while taking the higher US tariffs as a given fact,” Deutsche economist Yi Xiong wrote in the report.
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Visitors to Tianzifang, a popular shopping and cafe enclave in the French Concession area of Shanghai.
Yen Nee Lee | CNBC

The protracted trade war with the U.S. has gone on for more than a year, and shows no signs of abating. China said last Friday it would impose new tariffs on $75 billion worth of American goods. In retaliation, U.S. President Donald Trump said he would hike tariff rates on $550 billion of imports from China.
China economy ‘domestically driven’

But ANZ economists pointed to how China’s headline gross domestic product number was “barely affected” even after its exports started to drop in 2018 — when the trade war began.

“The (trade) impact on growth was over-rated,” ANZ said in a Wednesday report, pointing out that China’s first-half GDP growth this year was still 6.3% — even with tariffs already affecting its exports.

The trade war uncertainty led the Chinese government to lower its growth target of between 6% and 6.5% for 2019 — compared to last year’s roughly 6.5%.

While China’s economy has slowed, the direct contribution of the trade war “does not seem to be very large,” Deutsche Bank’s Xiong wrote. Instead, he said the slowing growth could largely be attributed to a decline in government investment, higher household debt, and deleveraging efforts — the process of reducing debt.

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Betting on consumption

Meanwhile, Beijing appears to be also betting on its own economy.

On Tuesday, it unveiled measures to boost consumption, including the possible removal of restrictions on auto purchases.

China’s State Council added it would encourage commercially struggling malls, stadiums and old factory zones to be transformed into commercial complexes, gym and entertainment centers.

It said Beijing will be extending retail hours to promote “the night economy,” with convenience stores and restaurants staying open longer.

Meanwhile, China will also try to diversify its supply chains and accelerate its opening up to other countries – reducing its reliance on the U.S. in the longer term, said the Deutsche Bank report.

“This will both help the Chinese economy and increase the cost for the US in a trade war,” Xiong wrote.